THE Future of Energy: Towards a Sustainable Development

Speech delivered by HE Mohammad Sanusi Barkindo, OPEC Secretary General at The European House - Ambrosetti. Session Title - Setting the Context: The Future of Energy, 20 September 2016, Rome, Italy.

[SLIDE 1]
Ladies and gentlemen,
Buongiorno. Good morning to you all.

[SLIDE 2]
I would like to thank the organizers, The European House – Ambrosetti, one of the leading independent global think tanks, for inviting me to speak at today’s event. It is a pleasure to be here, and to share the floor with so many distinguished speakers.

Being here in Rome as OPEC Secretary General, and at an event organized in cooperation with Eni, causes me to recall how both OPEC and Eni were formed. There is some shared history.

[SLIDE 3]
Eni was the vision of Enrico Mattei who helped created the company back in the 1950s, and then in later years negotiated important oil contracts in the Middle East, as well as a significant trade agreement with the then Soviet Union. He wanted to form a strong Italian energy corporation, and break the then oil market dominance of a group of multinational oil companies labelled the ‘Seven Sisters’.

Around the same time, in 1960, OPEC was formed in Baghdad, Iraq, by five oil-producing developing countries around the premise of cooperation, with a commitment to safeguard their legitimate national interests and to ensure order and stability in the international oil market. The main catalyst for its birth being when the ‘Seven Sisters’, who effectively controlled the quantity of oil extracted and decided how much was sold, to whom, and at what price, unilaterally reduced the posted prices of the crude they supplied.

Back then, both Eni and OPEC helped set the context for the future of the international oil market. Their formations were pioneering acts.

Of course, both have come a long way since, evolving into strong, mature and established organizations. In fact, I believe Eni has been present in all OPEC Member Countries at some point in its history, and remains active in most of them today. Looking ahead, I have no doubt that both OPEC and Eni will continue to play an important role in our global energy future, which brings me to the main theme of today’s conference.

[SLIDE 4]
I have been asked to help set the context in terms of ‘the future of energy’. It is a topic that offers up much scope for speakers and I am sure we will hear a diversity of viewpoints today.

It is a future laden with challenges and uncertainties, but also opportunities. I could easily speak for a lot longer than the time we have allocated! There will no doubt be areas where we may all agree, as well as areas where there will be divergences. This is natural, and I look forward to interesting and lively discussions.

I think one thing we can all agree on is the fact that the world will need more energy in the decades to come. It is easy to appreciate why.

In the period to 2040, the global economy is estimated to more than double. And over the same timeframe, world population is projected to reach around 9 billion, an increase of over 1.7 billion from today’s level.

And we should not forget that today around 2.7 billion people still rely on biomass for their basic needs, and 1.3 billion have no access to electricity. It is vital this is addressed. There is huge potential for socio-economic development in terms of expanding access to modern energy services.

We expect global energy demand to increase by almost 50 per cent by 2040. Energy will be required to power more homes, more services, more businesses, more cars, more planes, more ships … I could go on.

At the same time, however, we need to recognize the threat posed by climate change to our environment. Let me stress here that OPEC welcomes last year’s COP 21 agreement in Paris. Our Member Countries played a role in drafting the agreement, and they will also play a role in helping implement it.

So while the world will need more energy, it also needs to use it more efficiently and continually look to develop, evolve and adopt cleaner energy technologies.

To put it simply, the basic energy challenge can be summed up in two questions.

The first is how can we ensure there is enough supply to meet expected future demand growth?

And the second is how can this growth be achieved in a sustainable way, balancing the needs of people in relation to their social welfare, the economy and the environment?

[SLIDE 5]
What is clear is that all forms of energy are required. A diverse mix of sources is the best way forward. However, it is vital we appreciate just what each energy source can provide in the decades ahead.

There is no doubt that renewables, such as solar and wind, will continue to significantly expand their role. OPEC Member Countries recognize and support the development of renewables. Many of our countries have great sources of solar and wind, and significant investments are being made in these fields.

Biomass, nuclear and hydropower are also expected to maintain their share in the global energy mix in the years ahead.

Overall, these renewable energies and nuclear are expected to increase their share in the energy mix from 18 per cent in 2015 to 22 per cent by 2040.

All of the three main primary sources of energy – oil, gas and coal – will still supply more than three-quarters of the energy mix by 2040. Oil will be at just over 25 per cent, with coal slightly less, and gas slightly more.

From the perspective of oil and gas, it underscores the fact that they will remain central to supplying the growing global population with the critical energy it needs in the decades ahead.

Of course, you may say to me, well you would say this – you are the OPEC Secretary General. But I am also a realist. I do not see any outlook predicting that renewables will come close to overtaking oil and gas in the decades ahead.

[SLIDE 6]
In the industrialized world, we need to remember how important oil and gas have been to our past. They have transformed our economies and our societies. They have provided heat, light and mobility. They have created and sustained economic growth and prosperity. The products derived from these precious natural resources are fundamental to our daily lives.

However, we should not forget that this has not been the story for everyone. When we start up our cars, switch on a light, turn on our mobile phones, we need to recognize that these everyday things are still unknown to billions of people across the world who continue to suffer from energy poverty.

These are people that need their voices heard. They need access to reliable, safe and secure modern energy services at scale.

Of course, the economics of wanting more, coupled with growing populations and rising energy demand, has created challenges that were not foreseen when Thomas Edison was developing the light bulb, or when Henry Ford was mass producing the car.

I am talking here about the environmental challenge. In this regard, we need to recognize that the issue is not oil and gas themselves. The problem is the emissions that come from burning them.

It is a challenge we need to face head on. And I believe it is a challenge that can be overcome. Given what I have already said, it would be wrong of us to dismiss oil and gas as part of the past. I am a believer that solutions can be found in technologies that reduce and ultimately eliminate these emissions.

Here, the world has made progress, but much more work and collaboration is required. We need to continually look at the development and use of cleaner technologies, such as carbon capture and storage and many others in the future.

At OPEC, we recognize the importance of continually looking to advance the environmental credentials of oil, both in production and use. We welcome coordinated action with the industry and through various research and development platforms.

[SLIDE 7]
Given that I am speaking on behalf of OPEC, I feel I need to also talk specifically about the global oil market.

There is no doubt that oil will remain a fuel of choice for the foreseeable future. OPEC sees oil demand increasing by around 17 million barrels a day between now and 2040 to reach close to 110 million barrels a day.

To meet this expansion will require huge investments. We need to consider that new barrels are needed not only to increase production, but to accommodate for decline rates from existing fields. It is estimated that oil-related investment requirements are around $10 trillion in the period to 2040.

In thinking about this, it is vital to remember that the short-, medium- and long-term timeframes are all linked. What happens today can have a major bearing on the future. We need to ask ourselves whether the recent oil price environment is putting this future outlook at risk.

Over the past two years or so the industry has gone through some major readjustments and this had led to a significant drop off in investments. For example, global exploration and production spending fell by around 26 per cent in 2015, and a further 22 per cent drop is anticipated in 2016. Combined this amounts to around $300 billion.

Moreover, according to industry sources, in 2015 explorers discovered only about a tenth as much oil as they have annually on average since 1960. Just 2.7 billion barrels of new supply was discovered in 2015, the smallest amount since 1947.

This is a major concern for an industry that needs regular and predictable investments and output to provide the necessary supply in the medium- and longer terms. To reverse the declines, oil prices have to go up from recent levels.

[SLIDE 8]
We remain optimistic that the industry will emerge stronger from these tough times. We need to keep in mind that the story of our industry is one of many cycles, both up and down.

We have had periods when prices were low, and periods when prices were high. We have seen times when supply outstripped demand, and times when supply has struggled to keep up. There have been long periods of stability, as well as periods of instability.

But we need to remain vigilant, continually monitor the market and the global economy, and do everything we can do to make downward cycles shorter and less extreme. And of course, continue to make the industry ever more efficient in areas such as costs and technologies.

Today, the physical oil market remains in surplus, but it is evident that the rebalancing process is underway.

World economic growth is expected to be 2.9 per cent in 2016 and 3.1 per cent in 2017, although uncertainties such as the impact of the UK’s decision to leave the EU and the monetary policies of major central banks will need to be watched closely.

Global oil demand growth is expected to increase by around 1.2 million barrels a day in both 2016 and 2017. And non-OPEC oil supply is anticipated to contract by around 600,000 barrels a day this year, and then increase slightly by 200,000 barrels a day in 2017.

However, there remains a large stock overhang, and working this off is going to take some time.

Since the end of 2013, OECD commercial stocks have seen their five-year average move from a negative level of 85 million barrels to a surplus of around 340 million barrels today. For the same period there has also been a rise in non-OECD inventories, plus an expansion in some non-OECD strategic petroleum reserves.

These stock increases have been mainly driven by increasing non-OPEC liquids production, which grew by 3.8 million barrels a day in 2014 and 2015. OPEC liquids production grew by only 1.2 million barrels a day over the same period.

The OECD commercial stocks surplus against the five year-average has stabilized this year, but it is important that this starts to reduce. As we have seen in previous cycles, once this overhang starts falling on a regular basis then prices start to rise.

It is essential both OPEC and non-OPEC producers, as well as consumers, look to address the issue of the stock overhang. This is now central to the return of a balanced market.

[SLIDE 9]
I am sure this will be discussed during next week’s International Energy Forum (IEF) Ministerial Meeting in Algiers, with all OPEC Member Countries and many non-OPEC producers in attendance.

It is vital for all producers to sit around the table and discuss any possible action that may be required to stabilize the market. And this kind of cooperation needs to be done not only in times of instability, but also when the market is stable and balanced. Dialogue is vital at all times.

Of course, I cannot stand here and say dialogue will mean we find agreement on everything. We don’t live in a perfect world. But it is important for all stakeholders to find common ground, and look for shared solutions, where and when appropriate.

Over the years OPEC has pushed many forms of energy cooperation, including dialogues with the EU, Russia China and India, symposia and workshops with the IEF and the IEA, various initiatives with the G20, and meetings with other industry stakeholders.

[SLIDE 10]
Ladies and gentlemen,

Looking back to when OPEC and Eni were formed in the middle of last century, very few could have predicted how oil would change our societies for the better. And the backbone of this has been reliable and dependable suppliers, such as OPEC and Eni, which have delivered secure and steady supplies. I have no doubt this will continue in the future.

To conclude, I would like to recall an important and meaningful meeting organized by Eni in the early 1980s. It was held at the Palazzo Barberini and the meeting was called ‘Development through Cooperation’. With the same spirit and engagement, I want to underscore a similar vision and call for ‘stability and sustainability through active cooperation’.

To best achieve this, given the long-term nature of the industry, we need more clarity and predictability concerning the future - not only for oil, but energy in general. In this regard, I would like to leave you with one key word: 'stability’.

Stability for investments and output expansion to flourish;

Stability for economies around the world to grow;

Stability to provide access to modern energy services for those currently without;

And stability for producers that allows them a fair return from the exploitation of their exhaustible natural resources.

Stability is the key to a sustainable global energy future for us all.